Potential for Third LTRO Increasing, Says Fitch

The likelihood that a third longer-term refinancing operation (LTRO) will be needed by certain banks in ‘peripheral’ eurozone countries is increasing due to worries over eurozone sovereigns, limited deleveraging ability and flat-to-negative deposit trends among other factors, according to Fitch Ratings.

The timing of any further LTRO is uncertain, but is unlikely to be imminent without a further significant shock, such as a Greek exit from the eurozone. If a third LTRO is needed, Fitch believes it will be provided.

The first two three-year LTROs injected around €1 trillion into the European banking system and helped to ease wholesale funding markets for non-peripheral European banks at the start of the year. However, public issuance fell in April on rising concerns over the eurozone. Fitch believes funding markets will remain choppy for some time.

Other trends in countries that made the most use of the first two LTROs may not be strong enough to help the banks escape the need for further European Central Bank (ECB) funding. Deposits in the Spanish, Italian, Portuguese, Greek and Irish banking sectors are either steady or have been falling, preventing banks from tapping customers for more funding. Fitch believes banks will also struggle to achieve significant deleveraging because so many are trying to offload assets and because the assets they are trying to get rid of can be illiquid loans where there are some concerns over valuations.

Fitch thinks French banks are the least likely among the biggest users of the first two LTROs to need another round of funding from the ECB. The French banks have been able to strengthen customer deposits, in part by attracting money that had been deposited in money market funds (MMFs).


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